SPE/PS/CHOA 117524

PS2008-375

Examination of Oil Sands Projects: Gasification, CO2 Emissions and Supply

Costs
Katherine Elliott, Energy Resources Conservation Board1

Copyright 2008, SPE/PS/CHOA International Thermal Operations and Heavy Oil Symposium

This paper was prepared for presentation at the 2008 SPE International Thermal Operations and Heavy Oil Symposium held in Calgary, Alberta, Canada, 20–23 October 2008.

This paper was selected for presentation by an SPE/PS/CHOA Program Committee following review of information contained in a proposal submitted by the author(s). Contents of the paper,
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Abstract

Global conventional oil and natural gas reserves are on the decline. As a result, non-conventional resource plays, such as
Alberta’s oil sands, are experiencing heightened global interest. Bitumen extraction and upgrading is an energy intensive
process. This article focuses on gasification as a fuel alternative to natural gas for oil sands operation, reviewing current
trends in oil sands reserves, energy requirements, the gasification technology and carbon dioxide (CO2) emissions. A supply
cost methodology is employed to analyze the outlook of lower natural gas consumption and higher emission penalties for oil
sands projects that integrate gasification.

The results of the supply cost analysis illustrate that an integrated oil sands extraction, upgrading and gasification project
is less susceptible to operating cost pressures amidst rising natural gas prices due to its lower natural gas requirements.
However, without means to mitigate CO2 emissions, the supply cost approach indicates that federal offset penalties of CAD
60 per tonne erode any benefit associated with the decreased natural gas use.

Introduction

Constraints on raw materials and labour have caused capital costs of oil sands projects to escalate, some operators citing cost
overruns of 25 to 28 per cent from initial expectations (Harrison 2008a). In order to reduce or control project costs, oil sands
developers are embracing the application of new technologies or the use of mature technologies applied in new ways. One
such technology, gasification, is expected to reduce project operating costs in an era of increasing natural gas prices, thereby
improving project economics. The carbon feedstock partially oxidized within the gasification unit results in a synthetic gas
heavily concentrated in CO2. Provincial and federal regulations regarding CO2 emissions will tighten over the coming years,
leaving some concern with respect to the use of gasification technologies without the infrastructure required to mitigate its
associated greenhouse gas emissions.

This paper begins with a general discussion of Alberta’s oil sands reserves, production and energy requirements. Due to
expectations of high natural gas prices, the application of different technologies to the oil sands, in particular, the use of
gasification as a method to produce bitumen-derived synthesis gas is discussed. Two oil sands projects that are currently
under construction and implementing gasification technology are briefly described. A comparison of emission intensities
from projects that employ gasification leads to a forecast of carbon dioxide equivalent (CO2e) emissions from the oil sands
and the impact of Alberta’s legislation and the federal framework on greenhouse gas emissions are examined. The paper
concludes by employing a supply cost methodology to compare an integrated extraction and upgrading project utilizing
gasification versus a similar project utilizing a conventional steam methane reforming process (SMR).

1
The views expressed in this paper are those of the author and may not reflect the views of the ERCB.
2 SPE/PS/CHOA 117524

Oil Sands Reserves

Oil sands are areally extensive deposits of extra heavy crude or bitumen mixed mainly with sand and water (oil sands are
also comprised of clay particles and trace minerals to a smaller degree). Bitumen is viscous mixture of hydrocarbons that
does not flow in its natural state. Alberta’s oil sands deposits are located in the Northern portion of the province in three
designated Oil Sands Areas (OSA): Athabasca, Cold Lake and Peace River. These three OSA contain fifteen distinct oil
sands deposits. Together, the Athabasca, Cold Lake and Peace River OSA occupy an area of about 54 000 square miles
(about a third the size of the state of Texas). Small portions of these areas also contain heavy oil that can flow naturally to a
well, but for administrative purposes the heavy oil is considered part of the oil sands deposit and is included in the in-situ
production volumes.

In Alberta, where oil sands deposits are close to the surface, the bitumen laden sand is excavated using mining technology
and the bitumen is separated from the sands in surface facilities using hot water. Alternatively, in deeper oil sands deposits
where it is difficult to mine the resource the bitumen is extracted in-situ utilizing a variety of thermal and enhanced processes
such as the injection of steam, water or solvents. Ideally, in-situ processes facilitate the removal of bitumen from the reservoir
while keeping the sand in the reservoir.

As of 31 December 2007, Alberta’s Energy Resources Conservation Board (ERCB) estimated that the OSA contains as
much as 172.7 billion barrels (bbl) of remaining established reserves. As Fig. 1 illustrates, 31.2 billion bbl are considered
recoverable by surface mining techniques, while 141.5 billion bbl, or 82 per cent of the remaining established reserves, must
be recovered in-situ. In comparison, the remaining established reserves of conventional light-medium and heavy crude oil in
Alberta is in the order of 1.5 billion bbl.

Fig. 1. Comparison of Alberta crude oil and bitumen reserves

Alberta’s crude bitumen production totaled 482.1 million bbl in 2007, with cumulative production of bitumen at
approximately 6 billion bbl. Surface mining contributed 286.4 million bbl of bitumen production (69 per cent) in 2007, while
in-situ recovery accounted for the remaining 195.7 million bbl of bitumen production (41 per cent). Of the 482.1 million bbl
of bitumen, 305.5 million bbl (63 per cent) remained within the province as upgrader feedstock to produce 251.1 million bbl
of upgraded bitumen, referred to in this paper as synthetic crude oil (SCO). The combined production of non-upgraded
bitumen and SCO accounted for 64 per cent of Alberta’s total crude oil and equivalent production in 2007.

Current annual production and established reserves suggest there are more than 350 years of production remaining. Fig. 2
illustrates a forecast for bitumen production (ERCB 2008a). Crude bitumen production is expected to more than double from
1.3 million barrels per day (B/D) in 2007 to 3.2 million B/D by 2017. The growth in bitumen production is expected to
average 9 per cent annually over the forecast period, and is in line with the average annual growth of bitumen production in
Alberta that has occurred over the past 10 years.
SPE/PS/CHOA 117524 3

Growth in the production of SCO is expected to be slightly higher than the bitumen production forecast. SCO output is
expected to nearly triple from 688 thousand B/D in 2007 to 2 million B/D by 2017. The higher growth of SCO production is
influenced by the number of merchant upgraders expected to be operating within the forecast timeframe.

Fig. 2. Alberta bitumen and synthetic crude oil production

Oil Sands Energy Requirements

Bitumen has an API gravity averaging between 7 and 12 degrees and cannot be produced using conventional oil
extraction methods. All forms of bitumen extraction technology require energy to separate the bitumen from the sand. In-situ
bitumen extraction processes, such as Steam Assisted Gravity Drainage (SAGD) and Cyclic Steam Stimulation (CSS),
require fuel for steam generation. In addition, a small amount of electricity is purchased from the power grid or an on-site
cogeneration plant. Similarly, the process that occurs after bitumen is excavated from a mine requires fuel to fire boilers
where water is used to separate bitumen from sand. Larger amounts of power are required at the mining facility, therefore
mining and extraction facilities build-in the necessary cogeneration capacity that can provide power and thermal energy to the
operation, and small amounts of surplus electricity can be sold to the power grid.

Bitumen is quite low in value in comparison to lighter and sweeter oil; in 2007 the wellhead price of bitumen averaged 56
per cent of Alberta’s light-medium crude oil, and was roughly 51 per cent of West Texas Intermediate (WTI) priced in
Canadian dollars. The bitumen differentials take into account quality differences and minor transportation costs. To increase
the value and marketability of bitumen to downstream refiners it is converted to SCO at an upgrading facility or mixed with
diluent or SCO and transported to refineries.

After the extraction process, clean bitumen is combined with a diluent and pipelined to upgraders or coking refineries
which have the required facilities to upgrade the heavy oil to produce a lighter (more valuable) SCO. There are three bitumen
upgrading sites where plants are currently operating in Alberta. Upgraders at Suncor and Syncrude operations are integrated
with and located nearby their mining extraction operations north of Fort McMurray. The Shell Scotford upgrader is part of
the Athabasca Oil Sands Project. The upgrading operation is located near Edmonton and it is integrated with the Albian
Muskeg River Mine north of Fort McMurray.

Bitumen is upgraded to lighter synthetic crude by utilizing processes that increase the ratio of hydrogen to carbon
molecules. Two primary conventional technologies are employed at the existing upgraders within Alberta. Suncor uses a
coking process thereby removing carbon from the long hydrocarbon chain (bitumen). Shell upgrades the bitumen with a
hydrogen addition process, and Syncrude uses a combination of coking and hydro addition technologies. All three upgrading
operations use a secondary upgrading process to remove contaminants, such as nitrogen, sulphur and heavy metals, by
hydrotreating the upgraded crude.
4 SPE/PS/CHOA 117524

Upgrading requires large amounts of hydrogen, steam and power. Most of the energy and hydrogen requirements for
these upgraders are met by purchased natural gas, although offgas produced from the primary upgrading process is
conserved, treated and used within the facility as a source of fuel and/or hydrogen feedstock. Coke that is produced as a
byproduct of the upgrading process is also used as a source of fuel to fire boilers and generate steam or electricity, although it
is a small amount (less than 25 per cent) in proportion to the amount of coke produced from coking upgraders. The remaining
coke can be marketed although most of it is stored for future use.

Table 1 summarizes the energy requirements of oil sands projects operating in 2007 (Government of Alberta 2008c,
ERCB 2008d, 2008e). Natural gas intensities are representative of the final production for each operation. /n-situ natural gas
intensities are calculated per barrel of bitumen produced and mining and upgrading natural gas intensities are calculated per
barrel of SCO produced. Purchased natural gas at SAGD and CSS oil sands projects are averages of the commercial projects
in operation that have maintained a sustainable level of production. Natural gas intensities have not been adjusted for any
surplus electricity purchased from or generated and sold to the power grid.

Table 1. Energy requirements at oil sands operations, 2007

Purchased natural gas Process natural gas
intensity intenstity Coke Net electricity
Operation (Mcf/bbl) (Mcf/bbl) (kt/d) (MW)
In-situ
SAGD 1.5 - - n/a
CSS 1.4 - - n/a
Mining and Upgrading
Suncor 0.6 0.3 2.3 188
Syncrude 0.8 0.6 1.8 344
Athabasca OSP 0.8 0.9 - 161

The purchased natural gas intensities in Table 1 illustrate current energy requirements and serve to highlight the oil sands
industry’s reliance on natural gas. The table also illustrates that without technological advancements from current operating
practices, the average natural gas requirement per barrel of bitumen will increase overall as reserves indicate that production
from deeper deposits utilizing in-situ technologies will increase in proportion to mineable production. Looking very long
term, some in-situ reservoirs may have less desirable geological properties resulting in higher steam utilization, which will
also influence natural gas requirements and operating costs.

A number of the existing in-situ operations that were used to calculate the purchased natural gas intensities presented here
include cogeneration facilities, therefore, the natural gas intensities may appear to be overstated. In practice, SAGD
operations without cogeneration facilities have exhibited purchased natural gas intensities in the order of 1.1 Mcf/bbl bitumen
at a steam to oil ratio of 2.5 where as CSS requires upwards to 1.3 Mcf/bbl. However, integrating a cogeneration facility with
the bitumen extraction project provides the operator with an additional opportunity to improve the economics of the project.
Although purchased natural gas intensities are definitely higher when integrating a cogeneration facility, only a minor
amount of electricity is used on site, leaving a great deal of surplus electricity that can be sold to the power pool which
supplements operating revenues.

Fig. 3 illustrates a ten year forecast of the purchased natural gas requirements for bitumen recovery and upgrading to SCO
(adapted from ERCB 2008a). The forecast includes the natural gas required at existing and expected cogeneration plants that
are integrated with oil sands facilities (adapted from ERCB 2008a). The forecast was developed from a detailed breakdown
of oil sands projects comprising Fig. 2 and purchased natural gas intensities calculated from oil sands projects currently in
operation and energy material balances outlined in regulatory applications for proposed oil sands projects.
SPE/PS/CHOA 117524 5

Fig. 3. Purchased natural gas for oil sands operations

Natural gas requirements for the oil sands industry are expected to increase from 0.96 Bcf/d in 2007 to 2.52 Bcf/d by
2017; equivalent to an average annual increase of 10 per cent. Over the next ten years natural gas production from
conventional reserves and coal seams in Alberta is expected to decline at an average annual rate of 2 per cent per year. As a
result, total Alberta demand for natural gas will increase from 31 per cent of total Alberta supply in 2007 to 50 per cent of
total Alberta supply in 2017 (Fig. 4, adapted from ERCB 2008a). Most of the rise is illustrated by the increase in natural gas
consumption for oil sands production.

Fig. 4. Alberta marketable natural gas production and demand

Energy Prices and Parity

The historical Alberta reference prices of natural gas and light-medium crude oil at the well head are depicted in Fig. 5
(ERCB 2008b). The price of natural gas per unit of energy equivalent has been relatively inexpensive in comparison to crude
oil. The energy equivalent parity between natural gas and crude oil averaged 64 per cent between 1996 and 2005. In 2006 and
2007 the parity dropped to 56 per cent and 50 per cent respectively, as global crude oil prices increased and continental
natural gas prices decreased over these two years. Although the movement away from parity has played itself out over a
seemingly longer period, there have been many instances where crude oil and natural gas prices have approached parity. This
was observed in the winter of 2000/2001 and again at the end of 2003.
6 SPE/PS/CHOA 117524

Over the long term, the supply and demand balance of natural gas in North America is expected to tighten as conventional
domestic reserves diminish and new sources of supply become more costly. Liquefied Natural Gas (LNG) may provide
incremental supply to North America assuming netback pricing favours the North American marketplace over other global
markets. In any case, increased natural gas demand combined with slow growth in natural gas supply infers higher and more
volatile natural gas prices resulting in natural gas and crude oil prices moving closer to parity.

Fig. 5. Average annual reference price of natural gas and light-medium crude oil in Alberta

Similar expectations of rising natural gas prices are evident in the United States Energy Information Administration (EIA)
recent energy outlook (EIA 2008). The EIA lowered its forecast for natural gas consumption as expectations for higher
natural gas prices, along with lower economic growth, results in a downward reassessment of natural gas use within energy-
intensive industries, particularly in the industrial and electricity generation industries. The EIA now assumes that natural gas
consumption will only increase by 1 Tcf between 2006 and 2030, whereas previously released forecasts assumed a growth
rate in natural gas consumption of 4.4 Tcf over the same time period.

Oil Sands and the Application of Gasification Technology

If the energy equivalent prices of crude oil and natural gas are brought closer to parity the economics of an oil sands
project will deteriorate in the absence of an alternative to natural gas to meet the required fuel for electricity and steam
generation and hydrogen for upgrading. In the oil sands, many alternatives are being pursued to reduce risks from rising
natural gas prices. However, gasification is the only proven alternative that is currently being utilized on a commercial scale.

Gasification is a manufacturing process that converts lower-value hydrocarbons to manufactured synthesis gas (syngas)
which can be processed to produce chemicals, fertilizers, liquid fuels, and of particular importance to the oil sands industry,
hydrogen and electricity. The gasification process begins with the injection of a hydrocarbon feedstock, such as asphaltenes
or coke-like bitumen residues, with air or oxygen and steam into a high-temperature pressurized reactor vessel. Gasification
is not a combustion (complete oxidation) process, it is a reaction (partial oxidation) process, whereby the heat and pressure
inside the reactor break apart the chemical bonds of the feedstock to produce syngas. Gasification uses the heavier bitumen
bottoms to provide an alternative syngas, thereby reducing purchased natural gas requirements and the exposure to
fluctuations in natural gas prices.

The following section reviews the gasification technology and summarizes the operations of two facilities that are under
construction and will commence production within the next few years: OPTI Canada Inc. (OPTI) and Nexen Inc. (Nexen) in-
situ SAGD facility and upgrader joint venture and North West Upgrading’s merchant upgrader.

Currently, it is general practice for bitumen upgrading operations to obtain hydrogen and fuel requirements from natural
gas. Natural gas is both combusted as a fuel and is used as a feedstock in the SMR process to meet hydrogen needs. The SMR
process begins with methane reacting with steam to produce syngas made up of hydrogen (H2) and carbon monoxide (CO). A
SPE/PS/CHOA 117524 7

water-gas shift reaction then takes the CO produced in the first reaction and in the presence of steam over a catalyst forms H2
and CO2. The H2 produced from SMR includes small quantities of CO, CO2 and hydrogen sulphide (H2S) and requires further
purification to achieve a pure H2 stream.

Similar to the SMR process, the gasifier syngas is comprised mainly of CO and H2, the ratio of CO to H2 is dependent on
the quality of the feedstock. The syngas also contains smaller quantities of methane (CH4), CO2, H2S and water vapour. The
gasifier syngas typically has a heat value equivalent to ! of the content of natural gas. The syngas is purified to remove
sulphur, heavy metals and particulates. This clean-up stage enables the syngas to produce lower amounts of criteria air
contaminants (NOx and SOx) than traditional facilities that combust natural gas. The clean syngas can be used to make a
single product or any of the multiple products mentioned earlier. CO2 can also be removed pre-combustion, at the clean-up
stage, in a water-gas shift reaction process that is used to lower the CO content creating more H2 and a pure CO2 stream.

Table 2 outlines the expected emission rates for the OPTI/Nexen Long Lake2 and North West upgrader projects compared
to operating oil sands mines and upgraders. The data for Long Lake and North West was obtained from regulatory
applications while the emission intensities for existing oil sands projects were derived from Environment Canada’s National
Pollutant Release Inventory (NPRI) and oil sands volumetric statistics (Government of Alberta 2008c). As documented
earlier, the SO2 and NOx rates for the planned operations are significantly lower than traditional mining and upgrading
facilities. Part of the reason for lower quantities of criteria air contaminants may be due to the absence of mine fleets and
tailings. On the other hand, by virtue of the volume of gas required for SAGD operations and the use of gasifier syngas, the
Long Lake project is expected to double the CO2e emission intensity in comparison to the average of its integrated
competitors.

Table 2. Comparison of oil sand project emissions

CO2e SO2 NOx
Operation (t/thousand bbl) (kg/thousand bbl) (kg/thousand bbl)
Planned
North West upgrader 83 116 13
Opti/Nexen Long Lake 174 to 374 188 150
SAGD and upgrader
Actual (2006)
Suncor 97 495 203
Syncrude 133 852 161
Athabasca OSP 63 126 26

CO2 captured from the gasifier syngas pre-combustion is less costly than the capture of CO2 from natural gas post-
combustion (Bentein 2008). If the pure CO2 stream is captured and pipelined to a geological site capable of storage and/or
sequestration, emissions of the planned projects utilizing gasification are significantly lower than a comparable facility
without carbon capture and storage that uses natural gas as H2 feedstock and a source of fuel. For instance, North West
Upgrading proposes that up to 70 per cent of its CO2 emissions can be easily captured, which would imply a reduction in its
CO2e intensity from 83 tonnes per thousand barrels (t/thousand bbl) to 25 t/thousand bbl of SCO.

OPTI Canada Inc. and Nexen Inc. Long Lake in-situ SAGD facility and upgrading Joint Venture

The Long Lake project is located 40 kilometers southeast of Fort McMurray in northeastern Alberta. The first phase of
the project combines a SAGD facility with proprietary upgrading technology. The first phase of development will produce
approximately 72 000 B/D of bitumen from 81 SAGD well pairs that will be ultimately upgraded to 58 500 B/D of low
sulphur synthetic crude oil with an American Petroleum Institute (API) gravity of 38 degrees. The second phase has received
regulatory approval for an additional 72 000 B/D of bitumen upgrading capacity while the required SAGD facility
development (Long Lake South) awaits regulatory approval. Phase one is close to completion and the construction cost is
estimated at CAD 6.1 billion (2008 dollars).

The Long Lake partners use an OrCrudeTM process with integrated gasification, hydrocracking and cogeneration (170
MW). In the upgrading process, bitumen from the SAGD operations will be fed to the OrCrudeTM unit. OrCrudeTM, a
proprietary process owned by ORMAT Industries Ltd., utilizes distillation and solvent deasphalting combined with
hydrocracking technologies. The facilities are configured such that the heavy residue stream is recycled through the
upgrading process.

The primary products of the OrCrudeTM unit are sour synthetic or partially upgraded bitumen (OrCrudeTM) at 20 degree
API and a stream of liquid asphaltenes (A-Fuel), a solid black coke-like material. The OrCrudeTM product will be fed to the

2
Emissions estimate for Long Lake combines Long Lake and Long Lake South projects.
8 SPE/PS/CHOA 117524

hydrocracker unit while the A-Fuel will be sent to the gasifier. The hydrocracking unit includes hydrotreating and
hydrocracking reactors that complete the upgrading of the OrCrudeTM and remove sulphur, nitrogen, olefins and aromatics.

The gasifier, licensed from Shell Global Solutions International B.V., converts the A-Fuel into a raw syngas rich in H2
and CO. Further gas treatment using a SelexolTM process removes particulates and sulphur compounds from the raw syngas
resulting in a sweet syngas rich in H2. A pressure-swing absorption process removes some pure H2 from the syngas, enough
to meet the needs of the hydrocracker unit. The remaining syngas is used as fuel for steam and power generation. With an
additional shift-reaction unit, CO2 could also be removed at this stage.

Internal fuel from the gasifier will make the Long Lake phase one project 94 per cent self-sufficient in energy once an
overall target steam oil ratio (SOR) of 2.4 for their SAGD operation is achieved, offsetting most of the phase one natural gas
requirements. Natural gas requirements are estimated at 0.09 Mcf/bbl of SCO at an SOR of 2.4. At higher SORs, such as 3.3,
the self sufficiency of the project is expected to be reduced to 76 per cent, and in this scenario most of the internal fuel will be
directed to the generation of steam and electricity and additional natural gas (0.47 Mcf/bbl of SCO) will be required to
supplement fuel for steam, electricity generation and H2 feedstock demands. The joint venture partners are expecting a long-
term average SOR of 3.0 (Nickle’s 2008b).

North West Upgrader

The North West Upgrader will be located in the Industrial Heartland Area of Sturgeon County, 45 kilometers northeast of
Edmonton, Alberta. The upgrader will be developed in three phases of 50 000 B/D bitumen feedstock (77 000 B/D bitumen
blend) each. The total design capacity of the upgrader is 150 000 B/D bitumen to produce ultra low sulphur diesel, low
sulphur vacuum gas oil and other light products such as diluent and butane. At an estimated cost of CAD 4.2 billion (2007
dollars) site clearing has commenced and the first phase is planned to come on stream in 2011, Phases two and three would
be constructed by 2015.

North West proposes to use conventional upgrading processes, including distillation, hydrocracking, hydrotreating and
sulphur recovery along with gasification. Similar to the expectations of the Long Lake joint venture, the use of gasification
will avoid the need for coking methods which will reduce the volume of waste product and, as a result, the production of
solid coke waste will be averted.

North West will be utilizing Lurgi proprietary Multi Purpose Gasification (MPG®) and Rectisol® gas sweetening
processes. The gasifier will be fed with the residual hydrocracked bottoms of the bitumen feedstock. The net reaction will
result in a syngas which will be processed into CO2 and H2 streams; soot by-product slurry will be dewatered and pressed for
landfill. The gasifier is designed to optimize the production of H2 to meet the required feedstock demand for the
hydrocracking and hydroprocessing units, displacing about 120 million cubic feet (MMcf) of natural gas per day for all three
phases. Natural gas requirements will be minimal, estimated at 0.04 Mcf/bbl of upgraded product. As North West will not be
integrating the upgrader with a cogeneration facility, electricity requirements will be purchased from the power grid to
provide 97 MW for all three phases.

North West and Enhance Energy Inc. have announced a commercial arrangement for the use of its CO2 stream from the
Phase one gasifier which would otherwise be vented to the atmosphere. Enhance Energy Inc. plans to directthe CO2 for
enhanced oil recovery at conventional oil and gas fields near Clive in central Alberta. This arrangement will result in a 70 per
cent CO2 emission reduction from North West’s Phase one operations. Construction of the CO2 pipeline is expected in 2009,
pending regulatory application and approval, with operational startup slated for 2011.

Oil Sands and CO2e Emissions

In 2006, Alberta’s greenhouse gas emissions totaled 246.3 megatonnes (Mt) measured in carbon dioxide equivalent
(CO2e). Alberta maintained the lead, surpassing all provinces for having the largest greenhouse gas emissions and accounted
for 33 per cent of the national total (755.5 Mt). Emissions from Alberta’s industrial plants, electricity generation plants and
steam generators are estimated to account for 81 per cent of Alberta’s total greenhouse gas emissions.

Federal databases containing facility emissions (Greenhouse Gas Database and National Pollutant Release Inventory)
provide detailed emissions for each of Canada’s large final emitters, or facilities that emit the equivalent of 100 kilotonnes
(kt) or more of CO2e per year. According to the data on greenhouse gases, national CO2e emissions from large final emitters
amounted to 273.2 Mt in 2006. Large final emitters within Alberta accounted for 115.4 Mt or 42 per cent of the national
subset.
SPE/PS/CHOA 117524 9

Coal-fired electricity generation plants are by far the largest single sources of emissions in Alberta. In 2006, Alberta’s
seven coal-fired power stations contributed 47.2 Mt of CO2e. Greenhouse gas emissions from oil sands production, upgrading
and related support activities (cogeneration) are on the rise. Greenhouse gas emissions from oil sands correlate with the large
amount of fuel that is combusted throughout the various types of operations (i.e. thermal in-situ, mining and upgrading). In
2006, CO2e emissions from large final emitters in the oil sands industry amounted to 34.6 Mt. By estimating emissions from
smaller emitters not captured in the federal database the total oil sands CO2e emissions are in the order of 35.8 Mt.3

Alberta is uniquely different from other provinces with respect to its emissions profile. While industrial greenhouse gas
emissions are estimated to account for 81 per cent of Alberta’s total greenhouse gas emissions, provinces like Ontario
attribute less than half of their total greenhouse gas emissions to stationary industrial source points. In addition, Alberta has
numerous depleted oil and gas reservoirs and other geological formations (such as saline aquifers) that are suitable for the
testing and development of large scale CO2e enhanced oil recovery or CO2e sequestration. This means Alberta can play a
significant role in reducing provincial and national emissions by implementing industrial focused emission reduction policies
aimed at promoting carbon capture, sequestration and storage.

Alberta’s Industrial Greenhouse Gas Policy

Effective 1 July 2007, the Alberta government specified emission-intensity reduction targets for large final emitters
(Government of Alberta 2007a, 2007b). This legislation is part of Alberta’s long term action plan to combat climate change.
The action plan focuses on three areas to reduce greenhouse gas emissions by providing incentives for energy conservation,
green energy production, and carbon capture and storage. These initiatives are expected to deliver greenhouse gas reductions
of 200 Mt, 14 per cent below 2005 emission levels or a 50 per cent reduction below the business as usual case by 2050.
Carbon capture and storage is critical to achieving these goals and is expected to account for 70 per cent (139 Mt) of
Alberta’s emissions reductions by 2050. Implementation of carbon capture and storage is expected to coincide with the use of
new and next generation technologies in the oil sands (e.g. gasification).

Alberta’s emission-intensity reductions apply to all industries that had direct emissions totaling 100 kt or more per year
for any year on or after 2003. Industries that are regulated include power plants, oil sands and large-scale industrial facilities.
Established facilities were required to reduce emission intensities by 12 per cent from their baseline intensity in the second
half of 2007. New facilities, include those that have not completed 8 years of commercial operation, are required to reduce
emissions by 2 per cent per year following the third year of operation and up to 88 per cent of their established baseline
emissions intensity by the 9th year of commercial operation. All large final emitters had until March 31, 2008 to comply.

These facilities must meet the emission-intensity reduction targets by making operating improvements at the facility,
purchasing Alberta-based performance credits from other Alberta-based emission-intensity regulated facilities, purchasing
offset credits from specific sectors that have reduced their emissions in Alberta through various quantifiable mechanisms
(e.g. reduced tillage, afforestation), or by contributing to the Climate Change Emissions Management Fund at $15/tonne for
every tonne in excess of the facility’s reduction target. Currently, there are no limits on the use of fund credits for regulated
facilities to reduce greenhouse gases.

Federal Framework on Industrial Greenhouse Gas Emissions

In 2008, the Federal government introduced its regulatory framework for industrial greenhouse gas emissions. The
Federal framework involves an 18 per cent emissions intensity improvement from regulated sectors by 2010 from a base year
of 2006, and improvements of 2 per cent per year thereafter. For example, by 2020 existing plants require a 33 per cent
reduction from their 2006 emission-intensity. New facilities, those starting operations in 2004 or later, are given a three year
commissioning period after which they are required to reduce emissions intensity by 2 per cent per year. The Federal
regulations are in the process of being drafted, and public comment will ensue in the fall of 2008. The regulations are
expected to be approved and finalized by the fall of 2009, coming into force on 1 January 2010. The federal government also
indicates its intention to move from emission-intensity targets to fixed emission caps over the 2020 to 2025 timeframe.

Compliance to the Federal regulations on industrial greenhouse gas emissions will be achieved by contributing to a
technology fund and other offset and credit mechanisms. The federal technology fund will be used to promote the
development, deployment and diffusion of greenhouse gas reduction technologies. Contributions to the technology fund are
limited to specific percentages of the target intensity reduction for each year. In 2018 no further contributions to the fund will

3
Greenhouse gases of small industrial emitters (<100 kt CO2e) are calculated by employing an average CO2e production
intensity of 70 tonnes per thousand barrels of bitumen production on bitumen production from thermal projects not accounted
for in the NPRI.
10 SPE/PS/CHOA 117524

be accepted. Between 2010 and 2012 the contribution rate will be $15/tonne, $20/tonne in 2013, and increase with the rate of
nominal GDP in each subsequent year to 2017.
Other compliance mechanisms include bankable and tradable credits attributed to the reduction of greenhouse gases
through regulated-firms reducing emission-intensity beyond the regulatory requirement, measurable domestic offsets from
non-regulated industries reducing or removing greenhouse gases, credits earned from the Kyoto Protocol’s Clean
Development Mechanism, and a share of a 15 Mt credit for early action on reducing greenhouse gas emissions. The value of
the tradable offset credits will be determined by supply and demand in the carbon market.
The Federal framework will also include incentives for new oil sands facilities on stream from 2004 onward to implement
carbon capture and storage solutions. More stringent targets based on the use of carbon capture and storage by 2018 will
apply to in-situ and upgrading facilities on stream in 2012 or later. Specific targets of the carbon capture and storage
mechanism are to be determined during the development of the proposed regulations.
Impact of Regulations on Greenhouse Gas Emissions

Fig. 6 presents two greenhouse gas emission forecasts for the oil sands sector. First, the business as usual case was
forecasted using expectations on the production of SCO and bitumen for individual projects that aggregate to Fig. 2 (shown
earlier) and the CO2e emission intensities calculated from actual CO2e emission and production data or regulatory
applications submitted to the ERCB and Alberta Environment.
Without the provincial and federal CO2e emissions policies, by 2020 CO2e emissions from oil sands are expected to reach
127 Mt (347 kt/d) at bitumen production expected at levels of 3.4 million B/D. For comparative purposes, the Federal
government’s current trends scenario projects 110 Mt of CO2e for about 3.6 million B/D (Government of Canada 2008b).
The CO2e forecast presented here is higher due to the inclusion of CO2e emissions from cogeneration plants dedicated to
supplying electricity and thermal energy to oil sands operations.

Fig. 6. CO2e emission reduction scenarios

The second case illustrates the possible impact of the provincial legislation and federal framework requirements.
According to the provincial legislation, existing facilities are required to reduce emission intensities by 12 per cent beginning
1 July 2007. In 2010, the federal framework dictates that the cumulative emission-intensity reduction must reach 18 per cent
and decline by 2 per cent in each subsequent year of operation. Similar assumptions regarding facility age and baseline
intensity calculations have been made for each policy application to simplify the forecast. New facilities follow the rules
outlined in the provincial legislation and Federal framework on greenhouse gas emissions. The implementation of carbon
capture and storage was also applied to facilities and major expansions at existing facilities post 2011. For the purpose of this
forecast it is assumed that 70 per cent of CO2e emissions can be captured post 2018 for facilities starting operations on or
after 2012.4

4
Northwest Upgrader, pure CO2e from gasifier could be captured and accounting for 68 to 69 per cent of upgrader site-wide
emissions. (North West Upgrading 2007).
SPE/PS/CHOA 117524 11

In this forecast, by 2020, the combined Federal and Alberta greenhouse gas reduction policies for the oil sands sector
would result in a reduction in CO2e of 54 Mt (146 kt/d) from the business as usual case. Total CO2e emissions for the
province would be in the order of 73 Mt (201 kt/d). Comparable forecasts from the Federal government estimate an annual
reduction of 60 Mt of CO2e by 2020 (Government of Canada 2008b), while the Alberta government estimates that it can
achieve a reduction of 50 Mt of CO2e emissions through carbon capture and storage by 2020 (Government of Alberta 2008a).
However, despite the application of federal and provincial policies, the forecast illustrates that CO2e emissions from the oil
sands sector will continue to increase. By 2020, CO2e emissions may reach 38 Mt (100 kt/d) above current levels.

The provincial and federal policy case illustrated in Fig. 6 assumes CO2e emissions reductions will be achieved through
facility-based improvements. This implies that the marginal cost of real CO2e emission abatement for each facility is lower
than the marginal cost of any of the alternative compliance mechanisms (e.g. payment of various provincial and federal
penalties). As described earlier, each of the federal and Alberta emission policies give various options to comply with the
required CO2e intensity reductions.

With respect to the Alberta legislation, the oil sands operator must compare the cost of implementing CO2e capture and
storage to the alternative $15/t climate change emission management fund. Since the amount of contribution to the provincial
fund is open and the value of the fund is fixed at $15/t, comparative economics would dictate that the other compliance
credits and offsets would be valued close to the same amount of the fund. If the operator views that the lowest marginal cost
of emission abatement is $15/t then they would not make facility changes to reduce emissions. Rather, the operator would
comply with the Alberta regulations by purchasing credits, offsets or contribute to the fund and treat the penalty as a cost of
doing business.

The federal framework for CO2e emissions is more stringent with respect to using credits, thus providing increased
incentives to oil sands operators to implement firm reductions in CO2e intensities. Contribution into the federal technology
fund is limited to 70 per cent of the target in 2010. The allowable contribution is reduced by 5 percentage point increments
each year to 2014. By 2015 the maximum contribution to the fund amounts to 40 per cent of the required intensity reduction,
and 10 per cent from 2016 to 2017. The operator will need to meet the CO2e intensity reductions through other mechanisms,
as contributions into the technology fund will end in 2017. The fund will initially be valued at $15/t of CO2e from 2010 to
2012; in 2013 the fund will rise to $20/t and thereafter it will increase at the annual growth rate of nominal GDP. Oil sands
firms will have other options to comply through offsets and credits but will be required to meet strict emission-intensity
targets equivalent to carbon capture and storage by 2018.

Between 2007 and 2020, contributions into the provincial and federal technology funds could exceed C$3.2 billion. The
capital could be used to assist in the deployment of CO2 pipelines for enhanced oil recovery and sequestration. Without a CO2
pipeline in place, oil sands emissions would be higher than in the policy-driven scenario. If the production forecast holds CO2
emissions from the oil sands will undoubtedly range between 55 Mt and 91 Mt (150 kt/d and 250 kt/d) by 2020. If CO2
sequestration and storage is implemented on a large scale, greenhouse gas emissions from the oil sands will conform to the
lower end of this range.

Oil Sands Supply Costs

The supply cost (SC) is defined as the revenue required per unit of output to recover capital, all operating costs and a
predetermined rate-of-return on capital. In the supply cost equation the discounted gross revenue (R) is equivalent to the
discounted value of all expenditures (C). The supply cost equation is defined below, where r represents the discount rate, i is
a type of cost (e.g. capital, natural gas, non-energy operating, emission penalty), and t is time.

C it Rit
SC ¦ ¦ (1  r ) ¦ ¦ (1  r )
t t
t
t t
t

The assumptions used in the supply cost analysis are presented in Table 4 and Table 5. Table 4 outlines the economic and
market assumptions. Highlights include a 10 per cent after-tax internal rate of return; prices of CAD 8/gigajoule (GJ) were
employed to calculate natural gas costs, USD 110/bbl for WTI crude oil and an exchange rate of 0.952 USD/CAD were used
in the calculation of royalty rates under the proposed Alberta new royalty framework. The assumptions of the Alberta and
Federal CO2e emissions penalties are predicated based on the details outlined in the previous section.
Initially the supply cost is solved as the price per barrel of SCO production priced at the plant gate in Canadian dollars. It
is expected that SCO will receive a price similar to light-medium crude oil based on historical trends. Historical differentials
accounting for the quality differences and transportation between Alberta light-medium crude oil and West Texas
Intermediate (WTI), as well as an exchange rate assumption allow the conversion of the SCO supply cost to a WTI
equivalent price.
12 SPE/PS/CHOA 117524

Table 4. Economic and Market Assumptions

Real rate of return (per cent) 10
Inflation (per cent) 2
Exchange rate (USD/CAD) 0.952
Natural gas (CAD/GJ) 8
Electricity (CAD/kwh) 0.087
WTI (USD/bbl) 110
WTI (CAD/bbl) vs SCO (CAD/bbl) per cent 91 per cent
Provincial CO2e penalty (CAD/t) $15
Federal CO2e technology fund (CAD/t) 15 (in 2010-2012), 20 (in 2013),
+ 6 per cent each year thereafter.
Federal offsets and credits (CAD/t) 15
Provincial tax current Alberta rate
Federal tax general corporate rates enacted as at
March 31, 2008
Royalty proposed new royalty framework

Project assumptions are outlined in Table 5. Two hypothetical projects were developed, and the assumptions were guided
by the latest publicly available information and statistics on oil sands projects. The table compares an integrated oil sands
extraction, upgrading and gasification project to a similar project using steam methane reforming (SMR) for hydrogen
production. The projects can be distinguished by the assumptions on capital cost, non-energy operating costs, natural gas and
electricity requirements, and CO2e intensities. Both facilities are assumed new builds with production startup to commence in
2010. The estimated capital and operating costs do not include any form of CO2 separation, capture and transport. As a result
provincial and federal CO2e penalties incur in the fourth year of operation.

Table 5. Project assumptions

a
Assumption Integrated SAGD, upgrading and Integrated SAGD and upgrading
gasification
Capital Cost (CAD/thousand B/D) 104 90
Project life (years) 30 30
Sustaining capital (CAD/bbl) 1.25 1.25
Bitumen production target (thousand 122 122
B/D)
SCO production target (thousand B/D) 100 100
Non-energy operating cost (CAD/bbl) 19 18
Natural gas consumption (Mcf/bbl) 0.45 1.6
CO2e intensity (t/bbl) 0.4 0.1
CO2 capture none none
Cogeneration capacity (MW) 170 170
Onsite electricity requirement (MW) 85 75
a
costs per barrel of SCO production. Non-energy operating costs exclude natural gas cost and CO2e penalty

Fig. 7 and Fig. 8 illustrate the supply cost results for an integrated oil sands extraction, upgrading and gasification project
and an integrated oil sands extraction, upgrading and SMR project. The supply cost of SCO at the plant gate providing a 10
per cent real rate of return for the integrated upgrading and extraction project utilizing gasification, is approximately CAD
72/bbl of SCO (USD 75/bbl of WTI equivalent) at the plant gate. An integrated extraction and upgrading project using SMR,
as opposed to gasification, generates a supply cost of CAD 74/bbl of SCO (USD 77/bbl of WTI equivalent).

The difference in supply costs are largely a result of different requirements for natural gas (Appendix A, Fig. A-1 and A-
2). At natural gas prices of CAD 8/GJ the natural gas cost of an integrated extraction and upgrading project with gasification
accounts for 5.5 per cent of the total supply cost. On the other hand, with the equivalent price assumption the natural gas cost
for a project utilizing SMR accounts for 18.8 per cent of the supply cost. These percentages convert to a natural gas
component ranging between USD 4/bbl and USD 15/bbl of WTI equivalent depending on the project. Overall, the total
operating cost (including natural gas requirements and an electricity credit) is USD 22/bbl of WTI equivalent for the
integrated project employing gasification and USD 31/bbl of WTI equivalent for the integrated project using SMR.

The supply costs remain overwhelmingly sensitive to changes in capital cost. The capital costs compose approximately
one third of the total supply cost for the project using SMR and one half of the total supply cost for the project using
gasification. The integrated extraction and upgrading project employing SMR is also more susceptible to changes in natural
gas price. For example, a 25 per cent increase in the price of natural gas to CAD 10/GJ results in an increase to the supply
cost of USD 4/bbl to USD 81/bbl of WTI equivalent. A similar increase in the price of natural gas impacts the integrated
extraction and upgrading project utilizing gasification by USD 1/bbl, thereby increasing the supply cost to USD 76/bbl of
WTI equivalent.
SPE/PS/CHOA 117524 13

Fig. 7. Supply cost sensitivities: integrated oil sands extraction, upgrading and gasification project

Fig. 8. Supply cost sensitivities: integrated oil sands extraction, upgrading and SMR project

Emission costs contribute minimally to the final supply cost when federally required offset credits are priced at CAD 15/t.
For example, the project that includes gasification requires an additional cost of USD 1.26/bbl of WTI equivalent compared
with a no emission penalty case. The project with SMR requires an additional cost of USD 0.31/bbl of WTI equivalent to pay
for the penalties required to meet the CO2e intensity reduction targets.

Fig. 9 illustrates the supply cost results for the two types of integrated extraction and upgrading projects under
examination. The supply cost model was adjusted to incorporate an increased cost of complying with the federal policy
framework on industrial emissions. While the contribution allowance and price of the federal technology fund is maintained
at the federally suggested rates, the financial compliance mechanisms (i.e. tradable credits, domestic offsets) were adjusted
upwards. Such scenarios are plausible; when the ability to contribute to the federal technology fund is reduced over time it
encourages the free development of a market-based price for domestic offsets and tradable credits. While the federal market-
based compliance mechanisms are allowed to vary in this scenario, the provincial fund, offset and credits are maintained at
CAD 15/t.
14 SPE/PS/CHOA 117524

At federal offset and credit costs below CAD 60/t of CO2e, the integrated extraction and upgrading project with
gasification has a lower supply cost which results in higher profitability. This is due to the significant cost savings from
reduced natural gas consumption paired with a marginal cost to comply with federal and provincial emission policies. When
federal offset penalties near CAD 60/t both cases provide a similar return on capital. However, as compliance costs to meet
the federal reduction targets grow, the cost benefits associated with decreased natural gas use are eroded. At federal offset
and credit costs of CAD 150/t the supply cost of the project employing gasification is USD 81/bbl while the project using
natural gas and SMR has supply costs of USD 79/bbl of WTI equivalent. The gap widens to USD 3/bbl when the CO2e
penalty costs rise to CAD 210/t.

The point at which the economics of each project meet depends largely on the assumption of natural gas prices. Here
natural gas is assumed to average CAD 8/GJ over the long term. If the long term price of natural gas was set at CAD 10/GJ
the supply cost of the two projects would intersect at CAD 160/t of CO2e (Appendix A, Fig. A-3).

Fig. 9. Supply costs and penalties from CO2e emissions

Conclusion

While bitumen extraction and upgrading is an energy intensive process, high crude oil prices have resulted in heightened
global interest in bitumen projects. Bitumen production from Alberta’s oil sands has more than doubled since 2001.
Gasification, as applied to the oil sands, will demonstrate further progress by effectively reducing natural gas requirements
and industrial waste (e.g. tailings, NOx, SO2 emissions). The gasification technology complements CO2 capture mechanisms
by offering a purified stream for enhanced oil recovery, sequestration and storage. However, oil sands operators utilizing
gasification without CO2 capture will observe a material impact on project economics when carbon penalties rise.

Although the federal greenhouse gas reduction plan is not yet legislated, as proposed it is uncompromising and with
consequence to all oil sands operators. New extraction and upgrading facilities contemplating gasification will need to assess
the potential savings from reduced natural gas consumption against higher CO2e emissions in the absence of a capture
mechanism and the uncertainty of higher emission penalties. After comparing CO2e emission intensities across different
types of projects, the type of project that would be most heavily impacted by greenhouse gas emissions penalties is an in-situ
extraction with an upgrading project that employs the gasification technology. At natural gas prices between CAD 8/GJ and
CAD 10/GJ, the supply costs of an integrated in-situ project employing gasification are USD 2/bbl to USD 5/bbl of WTI
equivalent lower in comparison to a similar project utilizing SMR. The results of the supply cost analysis also illustrate that
the combined federal and provincial greenhouse gas emission policies may initially (when requiring emission offset
payments equivalent to CAD 15/t of CO2e) impact project economics by up to USD 1/bbl of WTI equivalent over a no-policy
scenario. However, the advantage of the in-situ project employing gasification erodes as federal offset penalties rise.
Assuming natural gas prices of CAD 8/GJ, when federal offset penalties move beyond CAD 60/t there is a disadvantage to
employing gasification without a means of CO2 capture. It is expected that a greater risk is involved if or when government
adopts a more stringent cap and trade type greenhouse gas policy.
SPE/PS/CHOA 117524 15

At this current time there is still uncertainty on the final federal legislation regarding industrial greenhouse gas emissions.
However, the fund mechanisms woven into the provincial and federal policies could encourage and nurture a CO2 industry
that includes its capture and transportation to sequestration and enhanced oil recovery. Potential candidates for sequestration
are numerous depleted oil and gas reservoirs and other geological formations across the province. Success in emission
reductions and CO2 sequestration has the potential to put Alberta, Canada on the map once again, not for its wealth of oil
reserves, rather for the knowledge, development and experience acquired through implementing technologies to reduce its
carbon footprint from industrial sources.

Acknowledgements

The author would like to thank Farhood Rahnama, Carol Crowfoot, Marie-Anne Kirsch for commenting on earlier drafts of
this paper.

Nomenclature

API = American Petroleum Institute

bbl = barrel
Bcf = billion cubic feet
Bcf/d = billion cubic feet per day
B/D = barrel per day
CAD = Canadian dollar
CSS = Cyclic Steam Stimulation
CH4 = methane
CO = carbon monoxide
CO2 = carbon dioxide
CO2e = carbon dioxide equivalent, determined by multiplying the amount of emissions of a non-carbon dioxide gas by the
global warming potential of the gas. Methane (CH4) has a global warming potential of 21 and nitrous oxide
(N2O) has a global warming potential of 310.
EIA = Energy Information Administration
ERCB = Energy Resources Conservation Board
GHG = Greenhouse gas
H2 = hydrogen
H2S = hydrogen sulphide
IPCC = Intergovernmental Panel on Climate Change
kt = kilotonne
Mcf = thousand cubic feet
Mcf/bbl = thousand cubic feet per barrel
MMcf = million cubic feet
Mt = megatonne
MW = megawatt
N2O = nitrous oxides (expressed as N2O)
NPRI = National Pollutant Release Inventory
OSA = Oil Sands Area
SCO = Synthetic Crude Oil
SMR = Steam Methane Reforming
SO2 = sulphur dioxide
SOR = Steam Oil Ratio
t = tonne
Tcf = trillion cubic feet
USD = United States dollar
WTI = West Texas Intermediate

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Appendix A

Fig. A-1. Supply costs: SAGD, upgrading with gasification at natural gas priced at CAD 8/GJ.

Fig. A-2. Supply costs: SAGD, upgrading with SMR for hydrogen at natural gas priced at CAD 8/GJ.
SPE/PS/CHOA 117524 19

Fig. A-3. Supply costs and penalties from CO2e emissions at natural gas priced at CAD 10/GJ. The supply cost from both types of
projects meet where emission penalties near C$165/T CO2e. At emission penalties greater than C$165/T the supply cost of a SAGD,
upgrading with gasification project is greater than a SAGD, upgrading with SMR technology.